The Soulful Science: What Economists Really Do and Why It Matters by Diane Coyle and The Real Wealth of Nations: Creating a Caring Economics by Riane Eisler (Review)
April 22, 2007        

The Soulful Science: What Economists Really Do and Why It Matters by Diane Coyle. Princeton University Press, 279 pp., $27.95.

The Real Wealth of Nations: Creating a Caring Economics by Riane Eisler. Berrett-Koehler, 318 pp., $24.95.

According to the late Ayatollah Khomeini: “Economics is for donkeys.” Though it grieves me to agree with the Supreme Ayatollah about anything, I have long, I confess, inclined to the same opinion. I don’t know what provoked Khomeini’s antipathy, but for me it was – to take one example among many – the smugly asinine deliverances of a distinguished economist, subsequently Secretary of the Treasury and president of Harvard, who admonished his colleagues at the World Bank: “Shouldn’t we be encouraging more migration of the dirty industries to the less developed countries? … I’ve always thought that under-populated countries in Africa are vastly under-polluted. … The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable, and we ought to face up to that.” If economics does indeed demonstrate that the rich are justified in paying the poor to suck up their pollution – and this very distinguished economist ought to know – then clearly economics is for donkeys.

On the other hand, there do seem to be quite a few non-asinine economists – Joseph Stiglitz, Paul Krugman, Jeffrey Sachs, Amartya Sen, James Galbraith, Samuel Bowles, among others – whose quantitative, analytical style and fondness for mathematical models very much resembles that of the donkeys. Besides, there’s a Nobel Prize in economics. Surely they don’t give Nobel Prizes to donkeys?

Useful or worse than useless? It’s a puzzle, which two new books approach from very different directions. Diane Coyle is an economics professor, journalist, and consultant. She believes that “economics gets an unfairly bad press,” all the more unfortunate because it is “entering a golden age.” Though it’s little known outside the profession, economics in the last twenty years has been “incredibly rich and fascinating,” a “ferment of intellectual excitement,” a cornucopia of “huge advances” and “astonishing,” “fantastically exciting,” “incredibly powerful,” “amazingly rich” work. The Soulful Science aims to bring us the good news.

Coyle helpfully divides the theoretical advances of the last few decades into macroeconomic (growth, trade, price theory, monetary policy) and microeconomic (finance, consumer behavior, organizations). In both areas, economics has advanced by moving beyond neoclassical theory, with its simplifying assumptions about individual knowledge and motives. For many years, the limited mathematical tools available to economists allowed them to build formal models only by assuming that economic actors had discrete and stable preferences (or “utility functions”) and full, accurate knowledge about the consequences of their actions. Critics objected to these implausible assumptions; but since formal models were economists’ stock in trade, they had to defend them or else acknowledge their own irrelevance. Naturally, they defended them fiercely. But recently, new mathematical techniques (eg, non-linear equations) and, perhaps most important, the explosive growth of computer power, have allowed economists to base their models – e.g., of financial or environmental markets – on more realistic assumptions.

Another neoclassical oversimplification was the law of diminishing returns to scale, which seemed to imply that all economies should converge, something that obviously hasn’t happened. Economists have recently become more aware of path dependence, or the effects of history and context. “Spillovers,” “human capital,” and “governance” are now the growth areas of growth theory.

Though insisting proudly that economics is now more soulful, Coyle warns against too much soul. There is, she worries, “a kind of romantic backlash against the rationalist foundations of economics,” fueled by the annoying fact that “we economists are unwilling to tolerate imprecision, wishful thinking, or flattering illusion in the study of human behavior and society.” It’s pretty clear how she would react to The Real Wealth of Nations” by Riane Eisler. Author of the bestselling The Chalice and the Blade and president of the Center for Partnership Studies, Eisler calls for a “caring economics.” In fact, the words “care” or “caring” appear several times on virtually every page of this book. You don’t have to be an uncaring, hyper-rationalistic economist to find this tiresome.

But if you can tune out the occasionally cloying language, there are some novel and valuable ideas here. Many of them have to do with measurement. The measures that mainstream economists most often use to gauge economic progress – GNP and per-capita income – can be extremely misleading. Everything, however useless or even harmful, that generates income for someone is counted toward GNP; while anything, however useful or even essential, that doesn’t generate income isn’t counted. Thus, the tobacco industry adds billions to GNP; mothers of small children add nothing. And given an increase in national income, whether everyone’s income rises equally or all the increase goes to the richest one percent, the country’s per capita income rises by exactly the same amount. People are beginning to work out more sensible economic indexes, and Eisler gives an interesting account of them. She also surveys the extensive but little-known research demonstrating that humane and generous – all right, caring – economic policies are often more efficient than dog-eat-dog competition.

It’s a great relief to know that there are other economic logics, according to which the case for dumping toxic waste in poor countries is less than impeccable.